Motor Industry KPI and best practice provided by Jeff Smith

When you are operating a business in the Motor Industry, you want to exploit as many opportunities as you can and extract as much profit as you can along the way; and it’s the same story for every business in history. However, running a franchised dealership can carry a real sting in the tail when you grow sales volumes in your Parts Department.

Directors and Dealer Principals often view their dealerships as one business with three different departments; Sales, Service and Parts. However, it’s a sad fact that the managers of these departments rarely see things this way and are focussed on delivering the bottom line profits that have been asked of them for their own individual department, regardless of what else is going on in the dealership.

Most bonus schemes for managers are based on their departmental performance rather than the dealership as a whole, so it’s no real surprise that this fragmented approach to profitability exists. That being said, let’s consider some of the hidden dangers that this strategic fragmentation causes when it comes to growing the Parts Department profitability.

The Parts Department is no different to the other departments in that it has a target to achieve which is given by the manufacturer to attain bonus payments and like all other targeted programmes, the target is bound to increase every year. It’s therefore the task of the Parts Manager to buy the required value of parts from the manufacturer and of course to sell them on to their customers in order to generate a profit.

The real question for the Parts Manager is this…If the parts target from the manufacturer continues to increase, who are we going to sell these parts to? It’s at this point where things really begin to unfold.

In a bid to help with increasing sales volumes, most manufacturers have attempted to assisted their dealer networks by creating a “Trade Parts Programme” whereby the dealer is helped and encouraged to develop strong links with other independent repairers.

These “Trade Parts Programmes” usually consist of a large discount, 30-day credit terms and the parts are delivered (usually the same day) directly to the trade business by the dedicated parts vans which are operated by the dealership. In addition to this, many manufacturers create special “Trade” packages to enhance these programmes which consist of higher discounts being given on the faster moving parts such as batteries, clutch and brake kits etc.

Obviously, these Trade Programmes are a great advantage to the Parts Manager because this is an area of their business that they can develop and grow at a rapid pace. For instance, one new trade customer could purchase thousands of pounds worth of parts which will make the task of reaching the manufacturers part target so much easier.

In addition to these factors, the manufacturers also have a vested interest in their dealer networks developing strong relationships with these so called “Trade Partners” because the manufacturers also have parts targets to achieve and they don’t want to lose out to this growing market.

Now here’s the hidden danger that few have considered.

Trade Sales in the Parts Department is a growing area because of the reasons and strategies stated above – and that’s the real problem, Trade Sales is a growing area.

Now you may well be asking, why is this problem? Parts sales growth is good, it helps us to hits target and it generates more profit so as long as the cash flow is managed, why is this a problem and where is the sting in the tail?

The sting in the tail becomes visible when you consider who your trade partners really are - it doesn’t take long to realise that most of the businesses to whom you are supplying a superb delivery service and high parts discounts are actually the same businesses who are destroying your own Service Retention. 

The hidden danger behind your successful Trades Sales is that your trade customers are most probably Independent Service and Repair Centres that operate in your local area and they are servicing and repairing cars of your franchise; they must be your franchise because you are supplying the parts, aren’t you?

If Independent Service Centres are servicing and repairing cars of your franchise in your local area and this sector is growing, that must mean that your own Service Retention % must be in decline.

When we take a close look here, it appears that these manufacturer-based Trade programmes, parts targeting and your own Parts Managers could be exacerbating the decline in your own Service Retention.

Now let’s make something very, very clear here. Personally speaking, I’m certainly not against the Independent Service and Repair Centres growing their businesses and taking advantage of this situation – “Good for them”, that’s what I say.

I’m writing this article because I want to draw your attention to the conflict in trading strategies in the franchised business model.

On one hand, franchised dealers are continuing to increase Service Department Labour Rates which only serves to force customers away when the customers’ car is between two and three years old. Customers then go to the Independent Service Centres because they are much cheaper.

When the customers go to the Independent Service Centres guess what happens next? Yes, the Independent Service Centre calls your Parts Department and you deliver the Parts to them, at a highly discounted price, on the same day and in a nice new van.

The Parts Manager receives the congratulations and accolades for hitting target and the Service Manager is berated for the continual decline in Service Retention, but does anyone question the links between these diametrically opposing strategies?

I’m certainly not saying that franchised dealers should stop all trade activity and I’m certainly not stating that Independent Service Centres are guilty of any wrongdoing in any way. I’m saying that if you are a franchised dealer and you want to retain older vehicles for servicing and increase your service retention, then you should consider the consequences of your decisions in relation to Trade Sales in the Parts Department.

If you are a franchised dealer, what is your view of the business? In your own view, is the dealership one business containing different departments or is it three completely different businesses that operate completely independent of each other?

Whatever your thoughts, just make sure that your aspirations for profit and strategies for development are running in the same direction because fragmentation on this level could cause your downfall.

As a closing note, I’d like you to consider the overall profitability of Trade Sales in the Parts Department. Many managers simply look at the Gross Profit in Trade Sales with retained profits hovering around 18%. However, have you considered the true cost of operating the parts van that delivers these trade parts?

It’s a very interesting discussion and maybe one for another article?

© Copyright Insight Training & Development Ltd 2008
You have our permission to provide a link to this page, but you are not allowed to copy it.

This entry was posted on Thursday, April 3rd, 2008 at 9:39 am and is filed under Parts Department.